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Edited Transcript of ALSK earnings conference call or presentation 7-May-19 6:00pm GMT

Q1 2019 Alaska Communications Systems Group Inc Earnings Call

Anchorage May 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Alaska Communications Systems Group Inc earnings conference call or presentation Tuesday, May 7, 2019 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anand Vadapalli

Alaska Communications Systems Group, Inc. - President, CEO & Director

* Laurie M. Butcher

Alaska Communications Systems Group, Inc. - SVP of Finance

* Tiffany Smith

Alaska Communications Systems Group, Inc. - Manager of Board & IR

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Presentation

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Operator [1]

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Good day, and welcome to the Alaska Communications Systems First Quarter 2019 Earnings Call. (Operator Instructions)

Today's conference is being recorded. At this time, I'd like to turn the call over to Ms. Tiffany Smith, Manager, Investor Relations. Please go ahead.

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Tiffany Smith, Alaska Communications Systems Group, Inc. - Manager of Board & IR [2]

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Thank you. Welcome to the Alaska Communications First Quarter 2019 Conference Call. I'm Tiffany Smith, Manager of Investor and Board Relations. With me today are Anand Vadapalli, President and Chief Executive Officer; Laurie Butcher, Senior Vice President of Finance; and Leonard Steinberg, General Counsel.

During this call, we'll be using a slide deck that we'd encourage everyone to have available. For those listening to this call via the webcast, the presentation will be displayed on your screen. For others, you will find it on our website, www.alsk.com.

Now please review Slide 3 for our safe harbor statement. During this call, company participants will make forward-looking statements as defined under U.S. securities laws. You are cautioned not to put undue reliance on forward-looking statements as actual results could differ materially as a result of a variety of factors, many of which are outside the company's control. Additionally, any non-GAAP measurements referred to during this call have been reconciled to their nearest GAAP measure. These reconciliations are in the appendix to our presentation. Following our remarks, we will open the line for questions.

With that, I would like to turn the call over to Anand. Anand?

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Anand Vadapalli, Alaska Communications Systems Group, Inc. - President, CEO & Director [3]

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Thank you, Tiffany. Good day, and thank you for joining us.

Starting with Slide 5. In 2019, we are building upon the progress made in 2018, and this is reflected in our business performance across the board. Let me begin with our larger Enterprise and Carrier customers.

Relating to the 5G wireless backhaul opportunity we mentioned last quarter, we are targeting turning up about 100 small cell towers by the end of this year. We expect this to be a multiyear program with the number of sites ramping up significantly over time.

From a management perspective, our focus is twofold: accelerating the pace of contracting with our customer while aggressively managing the cost of construction to drive capital efficiency. Further, the customer contract is 10 years for each site turned up, and we expect this contract to underwrite much of the capital invested towards this program. Additional returns on the capital investment will occur as we transform our network in our urban markets with significant fiber deployment that can be leveraged for other opportunities in both the Business and Wholesale and Consumer segments. We expect to invest between $7 million to $8 million towards this opportunity in 2019. As a reminder, we established a delayed draw term loan facility of $25 million to fund this investment, which remains undrawn as of the date of this call. We are also making solid progress in other customer verticals, including oil and gas where we have established additional disaster recovery capabilities for a customer while lining up incremental capacity to the North Slope.

Another area of focus for us is the education vertical, which is eligible for the E-rate funding program. As a reminder, E-rate is the commonly used name for the Schools and Libraries Program of the Universal Service Fund. We renewed a major customer contract with the Anchorage School District, the largest in the state, and we are targeting additional opportunities, building on our success in delivering satellite solution to the Kuspuk School District last year. In our carrier and federal vertical, our implementation work for the pre-funded fiber build opportunity continues, and we remain focused on contracting the subsequent phases of this opportunity.

A final note is our continued progress in the mass market consumer side. In the first quarter, we've been selling into the approximately 6,000 fixed wireless locations we enabled by the end of 2018, of which approximately 3,000 were for CAF II. We're just ramping up our sales effort into these locations, refining our marketing techniques into unique rural communities while developing installation and support standards, methods and procedures to help scale our operational capacity. We anticipate a slow but steady improvement in our penetration numbers over the upcoming several quarters. We expect to add about 3,000 more fixed wireless locations during the year as we continue progress, meeting our obligations under the CAF II program.

Outside of the CAF II program, our focus in mass market is on consumer multi-dwelling units with emphasis on military base housing as our starting point. We've let about 3,200 locations and now have about a 32% penetration rate. Typically, our onetime capital expenditures are about $450 for each apartment unit let. With contribution margin in the 90% range, assuming a 40% penetration, we see payback within approximately 2 years. We expect to double the number of locations passed in 2019, reaching about 6,000 units by the end of the year with approximately 80% being in military housing.

With this, let me now hand the call to Laurie who will cover our financial results. Laurie?

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Laurie M. Butcher, Alaska Communications Systems Group, Inc. - SVP of Finance [4]

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Thank you, Anand. Turning to Slide 7, let me start with our performance review for the first quarter of 2019 compared to the same period in 2018.

I'm pleased to announce that for the quarter, total revenue was $56.9 million, up 1.7% year-over-year. Providing greater detail, Business and Wholesale revenue represented 64.1% of our total revenue. At $36.5 million, it increased $2.7 million or 8.1% compared to the first quarter of 2018. Our growth was led by a 9.9% increase in Business and Wholesale broadband and a strong quarter for sales of managed IT services. Consumer revenue, representing 16.2% of total revenue, was $9.2 million for the quarter, decreasing 1.8% compared to the first quarter of 2018. Consumer broadband was $6.5 million, consistent with the same quarter of 2018, while voice revenues declined slightly. Regulatory revenue, representing 19.7% of total revenue, was down 12.7% for the quarter compared to the same period in 2018. This decline was anticipated and reflects changes in 2019 to the program under which we receive state universal services funds. More specifically, the Carrier of Last Resort Program was replaced with the essential network services program at roughly half the prior year funding levels. This is consistent with the directional view we gave you in our last earnings call regarding the secular trend of declining legacy revenues as our customers continue to migrate away from traditional voice lines and other legacy products and services.

Turning to Slide 8. Adjusted EBITDA was $15.2 million for the first quarter compared to $14.4 million in the same period in 2018. In the quarter, capital spending was $8.6 million compared to $8.7 million for the same period in 2018. Adjusted free cash flow was $3 million for the quarter, up from $1.8 million in the same quarter last year.

As we mentioned on our last call, in January, we refinanced our debt, creating additional access to capital while creating greater stability and flexibility on our balance sheet. We believe this will serve us well as we execute to our business plan in 2019. As part of the transaction, we recorded a loss on extinguishment of debt of $2.8 million and, through today, still have a completely undrawn $25 million delayed draw term loan and $20 million revolver.

At March 31, total debt was $177.8 million and net debt was $159.9 million compared to $170.3 million and $161.2 million, respectively, at December 31, 2018.

Total cash was $24.5 million at March 31, 2019 compared to $15 million at December 31, 2018.

Of note this quarter, on our balance sheet, which is schedule 2 of our press release, is the impact of the new lease accounting standard the company implemented in the period. In the interest of greater transparency, this standard puts all operating leases on the balance sheet as both a right-to-use asset (sic) [right-of-use asset] and a future liability. Upon implementation, we recorded operating lease assets and a corresponding liability of $82 million. Although the implementation of this new standard had a material impact grossing up the balance sheet, it did not have a material impact on our income statement.

All in all, this was a strong quarter for us. But as a reminder, our operating results can vary quarter-by-quarter as the result of many factors, which can include the timing of our sales delivery and associated revenue recognition and higher capital spending due to seasonal work, among other things.

We anticipate a strong back half of the year as we get the benefit from a variety of sales and installation initiatives. We have confidence in our business plan, and we reaffirm our guidance for the year. We expect total revenue to be between $230 million and $235 million, adjusted EBITDA to be between $60 million and $62 million, capital expenditures to be between $40 million and $42 million and adjusted free cash flow to be between $10 million and $12 million. I look forward to reporting our progress to each of these guidance measures in future quarters.

With that, let me hand the call back to Anand. Anand?

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Anand Vadapalli, Alaska Communications Systems Group, Inc. - President, CEO & Director [5]

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Thank you, Laurie.

Turning to Slide 9. Let me wrap with emphasis on a few items. First, we've concentrated on running a quality business. Our results speak for themselves. For the full years 2015 through 2018, we delivered a CAGR of 1.9% for total wireline revenue and 6.4% for adjusted EBITDA. We continue to foster growth in our most promising revenue streams. As of the end of the first quarter, our growth and CAF II revenue stand at 69% of total revenues as we reduce our reliance on the declining copper-based revenues. As our legacy revenues become a smaller portion of our total revenues, we expect to see both revenue and EBITDA growth accelerate over the next several years.

Compared to our public company peer group in the wireline telecoms sector, our operating performance stands out at near the top of our class. Similarly, compared to the same peer group, we have preserved our equity value versus the steep declines we see elsewhere in our sector. Over the years, we also diligently worked to strengthen our balance sheet. We did so again this quarter with a refinancing that created flexibility and capacity for future growth at very favorable terms.

Finally, our attention to cost management continues with changes made at the top. We have reduced the size of our executive team while promoting Bill Bishop to be our Chief Operations Officer with focus on our operating results.

At the same time, we have proposed reducing the size of our Board by 1/, 3 as reflected in our proxy statement. As you review our proxy statement, you will note several other shareholder-friendly actions. First, we made changes to our bylaws to implement term limits for our directors. When combined with our retirement age policy, this creates opportunities on an ongoing basis to bring new thinking and fresh ideas at the Board level. The Board size, as proposed, is much more in line with a company of our size. Further, 2 of the 5 independent directors, as proposed, have been referred to us by our 2 largest shareholders. This demonstrates our continued commitment to being responsive to our shareholder interests. And lastly, you will note an overwhelmingly strong orientation towards shareholder interests in our management compensation program. We are available to engage in calls with our shareholders to discuss any of our proxy proposals, and we seek your support and endorsement of all the proposals contained in our proxy.

Let me conclude by reemphasizing that our Board's top priority has been, is and will continue to be its consideration of all alternatives to maximize shareholder value, whether it be strategic transactions, business combinations, accretive growth investments or creating other forms of returns for shareholders. I look forward to providing updates on all fronts in the months and quarters ahead.

Thank you for joining us today. With that, let me open the call for questions. Operator?

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Operator [6]

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(Operator Instructions) And with no questions in the queue, I'd like to turn the call back over to management for any additional or closing remarks.

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Tiffany Smith, Alaska Communications Systems Group, Inc. - Manager of Board & IR [7]

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We'd like to thank you all for joining us on the call today. We welcome the opportunity to talk with our shareholders. If you are interested in meeting with us, whether by phone or in person on future roadshows, please reach out to Tiffany Smith in Investor Relations. Thank you, and good day.

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Operator [8]

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Once again, that does conclude our call for today. Thank you for your participation. You may now disconnect.